Twenty years ago I wrote an EPAC paper on Productivity in Australia. At that time the productivity of Australia’s government-owned infrastructure was around 40-45% of the OECD average. Far from having “more efficient cost structures” that “resulted in cheaper services for consumers,” government utilities were grossly inefficient, typified by feather-bedding and gold-plating, and unresponsive to user needs. They imposed costs on all trade-exposed firms, in both goods and services, which made it difficult for them to compete. Reform was essential.

The fact that subsequent reform was often flawed was not down to economists but to politicians. For example, in the late ‘80s there was a strong consensus among economists for retention of public sector telecoms infrastructure with market competition in supply of services. The ALP and Coalition both opposed this because they could raise more revenue from the sale of Telstra without separation. Corporatisation at the state level was heavily undermined by pro-union bias, appointment of party mates rather than commercial boards and directing the so-called “arms-length” boards so as to boost government revenue rather than to provide an efficient service with timely investment. There was no understanding by government of the boost that efficient infrastructure could provide for trade-exposed business. The South Australian electricity privatisation, for example, flew in the face of all economic advice, being aimed at maximisation of revenue rather than economic growth, the consequential high electricity prices had a serious negative impact. Queensland Rail, whose bulk freight charges were about six times the costs of miner-owned-and-operated rail freight in Western Australia, was exempted from NCP price rules for many years, and used the time as a monopoly supplier to lock-in users to long-term contracts so as to hobble eventual competition. Etc, etc.

I have seen from the inside that government provision of and direction of infrastructure is driven by short-term goals unrelated to the public interest, especially at state level. The role of government needs to be further reduced rather than increased.

Ken, you make some good points, but "I agree that there is an argument for governments financing and therefore owning capital intensive assets as their cost of money is lower" is not among them. On average, government has a lower cost of borrowing because it engages mainly in low-risk activities and can always raise taxes rather than default. However, government's risk for any particular infrastructure project is at least as high as that for the private sector, perhaps higher because of the lesser expertise and less outcome-oriented incentives for public servants. The relevant pricing of capital for each project should depend on the risk involved rather than the government's average cost of funds.

Re incentives, I demonstrated clearly within the Queensland government that the Australian Magnesium project could never be viable, my analysis was never challenged but those who backed the project got promoted and suffered no retribution when it failed with the loss of $450 million of mainly government money; I know of many similar instances, where the project risk was actually very high because of the low quality of government involvement. The private sector thrives or fails by getting risk assessment right, not so government.

Ken re:‘union capture’-There should be fair conditions and wages–but also flexibility when necessary for restructure–and with generous and just compensation where jobs are lost. There’s no saying that union coverage automatically means bad productivity.

Dovif2: Your claims are ideology–in the real sense of the word… You assume there is something ‘essentially’ inferior about the public sector. The reality is much more complex than this… Yes there was an ideological shift – which was in full swing 20 years ago – but since then neo-liberal assumptions have proven to be faulty.

Unjust fees and charges proliferate in Australia’s banking oligopoly-and have been accompanied by branch closures–with record profits.

Diversion of profits to services,here, may have been enough to pay for the expansive ‘fibre to the home’ broadband infrastructure I mention–over around four years….

You assume that the existing hegemony is self-legitimising and need not be questioned: that social democratic models are inferior and forever gone - regardless of their merits… I point to the current financial crisis, however, and respond:surely such times as these (recession/financial meltdown) demand a rethinking of our economic assumptions!

Public finance is cheaper because governments provide security…If there is less risk involved, governments–and the people they represent–reap the benefits…

Re:responsive private markets or public enterprise and services...

a) we can have both...

b) the key is a mobilised citizenry, and a participatory and critical public sphere – including media (public and private) … It’s up to us to ensure democracy works – and that public enterprise is held accountable..

Finally – re: the skill base of Telstra – this in itself is a good argument for re-socialisation.

Rhian – it’s true there are different means of subsidy for the disadvantaged. This can potentially be addressed through welfare and tax reform. But even here revenue from GBEs could be diverted into these aims… Otherwise they must come from somewhere else – eg: restructuring and increasing taxes; or austerity/program cuts elsewhere.

Finally - re:monopoly-see my points on duplicated cost structures and exploitation of market power

As someone who has worked in the telecommunication industry for over thirty years (from the PMG to Telstra via Telecom and OTC) I've seen significant changes in technology and corporate attitude.

While there has been a world-wide trend toward privatisation over the last decade it should be pointed out that most public Telcos remain at least partially owned by their respective governments and Australia is in the minority.

More than ever, telecommunications is the nerve centre of the entire economy - like the National Highways - and the core network should have remained in public hands with the customer related services left to competitive forces. Now that's gone and there's not much opportunity for true competition while one company owns that last kilometre of copper in the ground. If you think that this is all going to be replaced by optical fibre, you're in for a disappointment. If you think that 4G or 5G mobiles are going to handle it, expect to see Base Stations every kilometre or so.

All Telcos are just money-making machines and if Sol stays true to form, he'll completely ditch the non-profitable rural sectors as soon as he can and leave the taxpayer to subsidise them - just as they are now paying for rural mobile Base Stations and Satellite Broadband in those areas.

Telecom's "commission" was to provide a basic telephony service to about 98% of the population at a reasonable cost. It could have achieved this just in the "golden boomerang" (From Brisbane to Adelaide along the East Coast) but was driven by the national interest in providing widespread coverage. It cost about the same to buy a service in Wilcannia as it did in Randwick, due to heavy cross-subsidisation. The same outcome could have been achieved with Broadband.

We could indeed have faster Broadband tomorrow but in this case, it's competion that has stalled it - fear of handing over capacity to competitors.

Although the privatisation debate is well and truly over -
Efficiency is not the same as effectiveness and
Performance is a result of management - not ownership.

Well balanced article. About time we read an economic article from someone who appears to understand the complexities.
The myth that private management is inherently more effective/efficient really needs examining!
I have worked in the public and private sectors and have seen examples of good and bad in both.
Public inefficiencies can be controlled using good management practice. At the very least laws can ensure minimal secrecy. Private corruption is much more difficult as there is no clear line between legitimate profit and criminal profiteering. (The very concept of profiteering is anathema to neo-con, wacky-Right. (My) profits are God-given after all!)
Even without natural monopolies, the "competition driving efficiency" theory assumes a couple of things: ie. You need *at least* two companies to compete. So competition involves duplicating marketing, research, management and finance arrangements. Is the management really at least twice as good?
In situations where the government is politically unable to allow failure (the "natural" market response to a poor company), such as Private insurance, Private schooling, Private childcare and Private banking, the situation is as we see it now: Profits taken by capital investors over last 10 years now need to be supplanted by Public funds. Not only are we paying for multiple implementations, but we then prop-up the losers too!
(Jonny Howard hated Dole-bludgers and made life hard for them, but it didn't stop him bailing out his brother's failing company did it? This is typical of him.)
Some economic theory: Utility in a system is maximised only when profits are minimised. Competition works *because* it minimises profits, thus allowing capital to flow to where the maximum utility is gained. Any wonder that we face a crunch after 10 years of record profits? Like a crop stored badly or an engine left to rust, wealth evaporates when kept and stored badly.
To the "Privatise at all costs" brigade: I wonder which we would rather: Australian Government owned backbone, or "private" backbone owned by China?

I commend the author and the OLO editors for having published this excellent, thoughtful and timely article.

No, wobbles, I don't consider that the privatisation debate is over. It is obvious to all but a blind obstinate ideologue that the public interest has been almost immeasurably harmed by the policies of deregulation and privatisation of the past three decades.

Those who bought about this situation should be held to account for what they have done and made to pay if that is at all possible.

---

Rhian complained of Tristan attacking a 'caricature' of neo-liberalism. Anyone who had read Naomi Klein's "The Shock Doctrine" would understand that the reality of neo-liberalism is more grotesque than even the most imaginative cartoonist or satirist could have come up, whether in Australia or overseas.

An instructive example (not covered in Klein's book), of course is their clamouring for the NSW Government to privatise its electricity assets throughout 2008 even though it was opposed by 79%-86% of the public and by a vote in the order of 700 to 100 of the May 2008 NSW state Labor conference had been rejected explicitly in the 1999 elections and Iemma and Costa had promised not to privatise before the 2007 elections.

In what way could anyone hold that privatisation in these circumstances against the expressed wishes of the owners any better than theft?

(For more information, see http://candobetter.org/NswElectricity and "NSW power without pride" at http://forum.onlineopinion.com.au/thread.asp?discussion=2103&page=0)

The same is true of the privatisation of Telstra in 2005 at a time when 70% of the Australian stood opposed to the sale. I have written of this in my open letter to commend Greens Senator Scott Ludlam at http://candobetter.org/node/963/#DemocracySubverted and in "Coalition victory - a mandate to privatise?" of 31 Oct 2004 at http://citizensagainstsellingtelstra.com/content/4/elections-2004-outcome.html